Energy Intelligence Group
Tue, Oct 31, 2023
Synopsis
Long-term LNG supply deals between QatarEnergy and European oil and gas majors Shell, TotalEnergies, and Eni have raised discussions on contract terms and the future of fuel. Despite forecasts of declining gas demand in Europe, the deals running past the EU's 2050 net-zero target indicate sustained demand for gas. The contracts align with the majors' concession contracts and suggest that LNG will replace Russian pipeline gas imports in the long term. The flexibility of the deals allows for volume redirection, priced indexation is uncertain, and low-cost Qatari assets remain competitive even in a low-demand scenario.
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The long-term LNG supply deals recently signed between QatarEnergy and European oil and gas majors Shell, TotalEnergies and Eni sparked heated debate in the gas and LNG industry over the agreed contract terms and what they mean for the future of the fuel. The supply agreements also confirm QatarEnergy CEO and Qatar energy minister Saad al-Kaabi’s announcements that European deals will be clinched after the summer in what is expected to be a record year for LNG supply deals for the Middle Eastern supplier.
The three deals — for a combined total of 8 million tons per year of LNG, or 11 billion cubic meters per year— were all for a 27-year duration, with LNG offtake starting in 2026, and delivered ex ship (d.e.s) to European LNG import terminals in the Netherlands, France and Italy. The three majors all hold stakes in QatarEnergy’s North Field expansion projects: TotalEnergies and Shell each hold a 6.25% stake in the 32 million ton/yr North Field East (NFE) and 9.375% in the 16 million ton/yr North Field South (NFS). Eni holds only a 3.125% stake in NFE.
The contracts run past the EU’s 2050 net-zero target and show that the majors are betting on sustained demand for gas in Europe despite forecasts showing the contrary. The International Energy Agency’s (IEA) recent World Energy Outlook, for example, said that EU gas demand could fall under 30 Bcm by 2050. The agency, however, also left some room for optimism: “There is still space to contract more gas without falling foul of the European Union net-zero emissions by 2050 target.”
Why 27 Years?
TotalEnergies CEO Patrick Pouyanne confirmed last week during the firm’s third-quarter earnings call that the 27-year duration of the deals are aligned with the majors’ concession contracts for NFE and NFS — where the gas to feed the supply agreements will be sourced from. The concession agreements are for a 30-year duration, starting in 2023, while the LNG offtake will begin in 2026.
“The 27-year duration, in fact, is for all the LNG offtakers, all the partners of the North Field East and North Field South … we take 3 years to invest and then we have 27 years remaining. It covers, in fact, the full concession, which is, I think, a 30-year concession,” Pouyanne said on the Oct. 26 call.
When asked if the company was concerned about locking in LNG supply for such long-term contracts given the IEA’s sharp downgrade for European gas demand, the head of Total said he was “comfortable” with the deal as the IEA “does not tell you no gas” in a 2050 world. QatarEnergy did not respond to questions concerning the terms of the deals.
The low-cost nature of the Qatari projects will keep them in the game even in a potential low-demand world, according to Pouyanne. Analysts agree: “Given that Qatari assets are within the most efficient quartile of the cost curve, we believe that price should remain relatively competitive, even if gas demand was to decline,” Moody’s Investors Service senior analyst Janko Lukac tells Energy Intelligence.
How Viable is Gas in Europe?
Market observers suggest the long-term deals confirm the industry view that natural gas will still be present in the energy mix in a net-zero world and, specifically in Europe, LNG is needed to help fill the void left by the loss of Russian pipeline gas imports. The deals and the low-cost nature of Qatari gas “suggests that a portion of Russian pipeline gas to Europe will be replaced by LNG for the long term,” Lukac says.
“The industry’s view is that LNG will be needed long after gas demand has peaked and gone into decline globally,” according to Akos Losz, senior research associate at Columbia University’s Center on Global Energy Policy and former IEA gas analyst. “The outlook beyond 2030 depends a great deal on the successful implementation of the EU’s very ambitious targets on a whole range of competing energy sources from solar and wind to green hydrogen, biomethane and heat pumps.”
The “limited progress” made so far in Europe on green hydrogen and other decarbonization sectors is leading some to bet for a longer life for gas and LNG in Europe “until proven otherwise,” Losz notes. The EU is focusing more on the emissions profile of its gas and LNG imports, and Qatar is well placed as it is lowering its emissions through carbon capture and storage, renewable power and a jetty boil-off gas recovery system, he adds. For Qatar as a supplier, the deals extending past 2050 are also important in confirming that its volumes have a market in a net-zero world, an LNG expert says.
How Flexible Are the Deals?
Qatar is well known in the industry for its preference for delivered deals in order to avoid competing with its own volumes in the global market, leading to speculation over whether these new European deals would differ from previous long-term contracts.
But it appears that the contracts do have some flexibility attached. TotalEnergies will be able to redirect volumes if both parties agree, even though the volumes are expected to be delivered into Europe for the duration of the contract, Pouyanne confirmed during the earnings call. "I don't see how you could manage complex power electricity markets in Europe with a lot of renewables without having flexible assets," he added. Shell’s Qatari contract also allows for volumes to redirected, a source at the major confirms to Energy Intelligence. Eni, meanwhile, is not commenting on the commercial terms of its Qatari contract, a company spokesperson said.
The nature of the flexibility is less clear. All three contracts were described as delivering supplies “up to” a certain amount, which the LNG expert suggests they indicate terms resembling a ‘put option’ allowing for uncommitted cargoes to be delivered elsewhere once minimum delivery obligations are met. “This was the term used in contracts for Qatar’s existing capacity that were signed with Centrica, Uniper, Petronas etc. for delivery to Europe, which appeared effectively to be put options for cargoes that were surplus to the requirements of what, at the time of signing, were higher priced markets in Asia. I am not surprised, therefore, that cargoes can be diverted if it meets the interest of both parties,” the expert said.
However, diversions could lead to a loss of revenue in the marketing of regasified LNG for the European majors, the expert warns. “The provisions I have seen in long-term d.e.s contracts are along the lines of: the buyer may request the diversion of a cargo to an alternative destination; the seller will use reasonable efforts to accept the request and if it does agree the buyer will pay any additional cost incurred,” he said. “The extra cost of the voyage is relatively easy to calculate, but what about the potential indirect costs of having to rearrange the sellers’ shipping program?”
But the advantage with the contracts for deliveries to Europe is that shipping distances to Asia from Qatar are roughly similar as Qatar to Europe, the expert notes.
How are the Contracts Priced?
Market observers have diverging views on the pricing indexation for the Qatari deals, as the indexation was not disclosed by the parties involved.
A Singapore-based trader tells Energy Intelligence that it is likely the deals are indexed to the European gas benchmark, the Dutch TTF. He suggests the deals are priced at a discount of $1 or more to TTF in order to take into consideration of regasification costs.
While Asian buyers of Qatari volumes have shown preference for oil indexation, an analyst at a European trader tells Energy Intelligence that he would be “astonished” if the European majors have agreed to an oil indexation given the contracts are d.e.s and for such a long duration. “I’m not sure how they manage that risk unless they got a low [price] slope,” the analyst said.
The contracts probably contain price review clauses if the price formula contains oil indexation in whole or in part, Mark Mangan, partner at law firm Dechert tells Energy Intelligence. “There will also probably be clauses allowing adjustment in the event of hardship/change of circumstances, force majeure etc. With that said, these contracts are not easily renegotiated in practice as one side’s gain will usually be matched by the other side’s pain,” Mangan says.
The LNG expert believes it is unlikely that a hybrid pricing structure has been adopted given the difficulties in hedging the price exposure. He instead thinks the contracts have been linked “predominantly TTF, but possibly other indices.”
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